“When a company in financial difficulties is giving $1.4 billion to shareholders and handing executives millions of dollars in bonuses, it’s ridiculous to claim that legislation to protect pensions will affect the ability of the company to survive. What legislation to give pension plans priority in bankruptcy proceedings will do is protect workers and retirees from greed and incompetence.”Before I get to Bill C-384, let's have a look at what prompted this proposed bill. In September, the Canadian Press reported, Sears case shows the risk of defined benefit pensions for employees:
— Larry Brown, NUPGE President
Ottawa (27 Nov. 2017) — A private member's bill, Bill C-384, introduced by Scott Duvall, NDP MP for Hamilton Mountain, shows that it is possible to protect pensions when companies enter bankruptcy proceedings.
In the last few years there has been a growing trend where workers and pensioners are seeing significant cuts to their pension plans after the companies they worked for went bankrupt. Sears Canada is just the most recent example. US Steel, Nortel, and Can-west are the better known of the other companies where pensions were cut after the companies went bankrupt.
There are 2 reasons pensions are being cut when companies enter bankruptcy proceedings. When pension plans are under-funded, companies find it easy to delay making the payments necessary to ensure they are fully funded. Then, when companies enter bankruptcy proceedings, workers and pensioners are at the back of the line when the company is wound up or restructured.
“Current pension rules make it far too easy for companies to put off dealing with pension plan deficits. Then if the company enters bankruptcy proceedings it is retirees who pay the price,” said Larry Brown, President of the National Union of Public and General Employees (NUPGE).
Bill C-384 would put workers and retirees first
Bill C-384 would amend the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) so that a company going through bankruptcy proceedings would have to make sure its pension plan was fully funded before other creditors could be paid. The bill would also prevent companies going through BIA or CCAA proceedings from cancelling benefits for workers or retirees.
Sears Canada liquidation an example of why Bill C-384 needed
People who worked at Sears Canada could see their pensions cut by 20 per cent because the pension plan was not fully funded when the company entered bankruptcy proceedings. Extended health and dental benefits were cancelled. People who have worked at Sears for decades are being laid off without getting the severance pay they are owed.
But while low- and middle-income pensioners will see their pensions cut, pensions they worked decades to earn, some select executives and senior managers are getting $6.2 million in retention bonuses. Existing bankruptcy laws protect retention bonus payments to executives, even though the company is being liquidated.
Excessive payments to shareholders in the years leading up to bankruptcy proceedings are also not a problem under current legislation. At the same time that the workers’ pension plan slid into deficit, Sears Canada spent $1.4 billion on payments to shareholders.
“When a company in financial difficulties is giving $1.4 billion to shareholders and handing executives millions of dollars in bonuses, it’s ridiculous to claim that legislation to protect pensions will affect the ability of the company to survive. What legislation to give pension plans priority in bankruptcy proceedings will do is protect workers and retirees from greed and incompetence. That’s why NUPGE is joining with other unions to support Bill C-384,” said Larry Brown, NUPGE President.
Sue Earl, a 38-year Ontario-based Sears Canada employee, was shocked when she found out she would only initially receive 81 per cent of the value of her pension as part of the company's insolvency process.
The 64-year-old from Cobourg, Ont., had assumed her defined-benefit pension was "money in the bank," a guaranteed amount she'd receive in retirement regardless of the financial health of the failing retailer.
But then, she also didn't think Sears would cancel the severance payments she'd been receiving since her store was closed last year — that's what happened after it filed for court protection from creditors in June.
She said the other 19 per cent of her defined-benefit pension is "up in the air."
"Our letter said it would be paid out to us in the next five years, but that depends what they do with it, whether they wind it up or what's going to happen," Earl said.
Severance gone, pension under threat
"It's just one more slap, really. You lose your severance and then you find out you might not get all of your pension money."
Personal finance experts say the Sears case shows the risk of depending too much on a defined-benefit pension plan to provide income in retirement if the plan is not fully funded and the sponsor goes bust.
James McCreath, an associate portfolio manager with BMO Nesbitt Burns in Calgary, says employer-sponsored pension plans are a good thing because they force people to save for retirement, but when a company isn't healthy enough to fund them, it can result in a lot of stress for employees.
"If I had a defined benefit plan, I'd certainly sharpen my pencil on reviewing it to see if there's an unfunded liability and how that perhaps would impact my retirement," he said.
Tony Salgado, director of CIBC Wealth Strategies in Toronto, says many don't even know what kind of pension plan they have, much less what their retirement income might be.
"Incorporate some wiggle room," he advises.
"If you were to take a 10 per cent haircut on what you have through your retirement pension plan, what other sources of income will you have available?"
Promise of retirement income
Defined-benefit plans promise members a retirement income usually based on salary and years of service. But an aging population that is living longer has increased the cost of the plans at the same time that low interest rates have also increased funding requirements, leaving many plan sponsors with a shortfall.
Sears has been paying $3.7 million a month to top up its underfunded defined-benefit plan, as required by Ontario provincial law, but has asked a court to allow it to suspend those payments while it restructures.
Meanwhile, Ontario has proposed new rules that would see defined-benefit pension plans it regulates not require topping up as long as they are 85 per cent funded, down from the current 100 per cent.
In Cobourg, Sue Earl says she is receiving employment insurance benefits and has started her Canada Pension Plan payments early to top up her RRSPs and pay down debt.
Remaining pension goes to locked-in accountSue and her husband are lucky, the new reality of old age in America (and Canada) is people have to work till they die. They simply can't afford to retire because they have little to no savings.
She has received a payout on the defined-contribution pension plan Sears started in 2008, but is still waiting for payout of the defined benefit plan it replaced — both have to be reinvested in locked-in accounts until retirement.
Her husband, Ralph, has a small pension and, after a "hard look at our finances," she thinks they'll be OK.
"I mean, we're not driving Mercedes, we're going to drive our car into the ground. If we take a trip we're going to be budgeting for it. I mean, we're going to have to be careful with our money."
What happened to Sears Canada employees is tragic but nothing new. I've written about pensioners taking a back seat to bondholders as far back as 2009. Then it was Nortel employees who were under pressure.
Every time I read these stories, I cringe for two reasons. First, it's simply indefensible that people working ten, twenty or more years get screwed on their severance and defined-benefit pension, and second and more importantly, it just proves my point most companies shouldn't be managing pensions.
Sure, there are exceptions. Air Canada and CN come to mind. They both have great defined-benefit (DB) plans (I think Air Canada is shifting new employees to DC now), but the majority of corporations aren't doing a great job managing their corporate DB plan.
This is why I believe enhanced CPP is critical for the future of retirement security in Canada and have openly stated that CPPIB or some new federally backed, large, well-governed pension fund should manage the corporate DB pensions that still exist in Canada. Get companies out of pensions altogether and let them focus on their core business.
Of course, that will never happen, which is why the NDP is putting forth Bill C-384. While I'm all for the rights of pensioners and the disabled over bondholders, the reality is such changes to the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) come at a cost.
In particular, it will make it more expensive for all companies to borrow in credit markets, especially those with underfunded pensions. Everything comes at a cost, if you change the law, it will cost more to borrow money.
Another option, which Rob Carrick discusses in his article on what Bill Morneau’s pension bill could mean for your retirement, is to shift everyone to a target benefit plan, but as I've stated before, while these plans are better than DC, they're still beholden to the vagaries of public markets and are far inferior to a large, well-governed DB plan which invests across public and private markets all over the world.
Lastly, for all of you worried about your company's pension and savings, I suggest you visit Diane Urquhart's website, Is My Money Safe?, where you will learn a lot and are even able to contact her if you have questions. Diane has worked vigorously on high profile files on behalf of Nortel pensioners and the disabled and she knows her stuff.
One last bit of advice. Wherever you work, whether it's a big or small company, always diversify and don't rely on company stock options for your retirement. I don't care if you work at Air Canada, Royal Bank, Bell Canada, or company XYZ, don't be stupid, you're already exposed to that company so diversify away from it in your retirement savings (use low cost exchange traded funds, balance your portfolio with global stocks and bond or invest in mutual funds but first get advice from a financial advisor and ask them to be clear on fees).
I am saying this because sometimes I see some very smart people commit cardinal sins and they often don't realize it until it's too late.
Below, Sears Canada is going through a restructuring process, leaving retirees wondering what will remain of their pensions, and it could be a while before they find out. Amanda Ferguson with the details on defined benefit pension plans and their pitfalls (July, 2017).
I hate to say it but there will be more cases like this in the future which is why we need to think long and hard as to how we will protect workers and retirees going forward, not just bondholders.